Smaller Trading Strategies May Be More Volatile
Smaller Trading Strategies May Be More Volatile
By:Kai Zeng
Smaller options positions don't always lower risk, plus delta selection and spread width affect volatility
- Position volatility is a crucial metric for evaluating portfolio performance.
- Small or seemingly less risky strategies can sometimes produce higher volatility relative to their position size.
- Risk-defined positions with extremely tight wings can lead to disproportionately high volatility as a percentage of capital used, introducing unnecessary risk.
Traders frequently analyze key statistics like average profit and loss statements (P/L), win rate and losses for various strategies. Yet, an often underappreciated metric is P/L volatility, which can provide insight into stability and risk.
Consider the performance of 10𝜟 Strangles vs. 20𝜟 strangles, both with 45 days to expiration (DTE) and exited at 21 DTE.
As expected, the 10𝜟 strangles with smaller deltas showed lower P/L but achieved a higher win rate, smaller losses and reduced P/L volatility.
However, when assessing P/L volatility as a percentage of the initial credit, the smaller delta strategy appeared more volatile because of lower premiums. This suggests a strategy perceived as "cheaper" or "safer" might not necessarily lead to reduced P/L or portfolio volatility.
.jpg?format=pjpg&auto=webp&quality=50&width=1000&disable=upscale)
Next, let's examine SPY Put Spreads with varying wings: 30𝜟/25𝜟, 30𝜟/15𝜟, and 30𝜟/5𝜟, all exited at 21 DTE.
We found riskier strategies with wider wings resulted in higher average P/L and win rates but exhibited lower volatility relative to the credit received.
.jpg?format=pjpg&auto=webp&quality=50&width=1000&disable=upscale)
Conversely, tighter wing spreads, perceived as less risky, showed greater position volatility. This indicates enlarging single positions moderately can help mitigate portfolio risk by reducing volatility.
.jpg?format=pjpg&auto=webp&quality=50&width=1000&disable=upscale)
Kai Zeng, director of the research team and head of Chinese content at tastylive, has 20 years of experience in markets and derivatives trading. He cohosts several live shows, including From Theory to Practice and Building Blocks. @kai_zeng1
For live daily programming, market news and commentary, visit tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex & macro.
Trade with a better broker, open a tastytrade account today. tastylive, Inc. and tastytrade, Inc. are separate but affiliated companies.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.
© copyright 2013 - 2025 tastylive, Inc. All Rights Reserved. Applicable portions of the Terms of Use on tastylive.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.